Philippines: Mining Industry

Philippines: Mining Industry Page 1 of 7

Edu Niala August 2008

Summary
The Philippine mining industry holds much potential. Foreign and local investors continue to tap opportunities in minerals exploration, production and development, which bode well for suppliers of mining technology, products, heavy equipment and ancillary services. While regulatory, environmental and social issues exist, industry insiders are still optimistic that Philippine mining is on the right track. While major global suppliers are firmly established in a highly competitive, price-driven environment, the market is still open to new entrants, especially when majority of the priority mining projects identified by the government become fully operational within the next few years. U.S. suppliers are encouraged to seek local representation and conduct due diligence on local partners who are expected to provide after-market support to their clientele.

Market Demand
Generally, industry players take stock of a renewed optimism for Philippine mining despite some initial setbacks after the Philippine Supreme Court upheld the constitutionality of the Mining Act of 1995 (Republic Act 7942). The positive yet cautious outlook bodes well for mining equipment suppliers, service providers and technology experts who are now repositioning themselves in the Philippines, in anticipation of the industrys resurgence within the next five to ten years. Industry players therefore expect a surge in demand for mining services, equipment, consumables and other related items. This demand stems from existing mining operations, revival and/or rehabilitation of old mine sites, and exploration of new areas with high mineral prospectivity. Industry players project that demand for such products will continue to increase, especially within the next few years when the priority projects become operational and new entrants find their way into other mining projects. The entry (or in some cases re-entry) of foreign companies into the Philippine mining scene has likewise brought to fore new and state-of-the-art mining techniques. This technology transfer has also been manifested with the entry of new suppliers and service providers, thereby giving mining contractors, operators and other end-users more options to choose from. With regard to heavy equipment and other mining-related technology, the local market is still import dependent. Local manufacturing, if at all, is limited to casting, steel fabrication and machining of replacement parts for existing mining equipment from OEMs. Most mining supplies, spare or replacement parts and consumables are also imported. Industry experts note that suppliers from new sources such as India, China and South Africa, are beginning to establish themselves in the market. Mining companies, particularly those active in the production stage, are always on the lookout for new technology, products or services that minimize equipment downtime; improve efficiency to keep up with tight production schedules; and reduce operation and maintenance costs. Meanwhile, after two tailings spill incidents that occurred in 2005 at a polymetallic mine run by Australian firm Lafayette on Rapu Rapu island, mine safety and environmental protection have also been brought to fore as pressing concerns. The government formed a Minerals Development Council in 2005 to coordinate the efforts of mining-related government agencies to improve transparency and to encourage an investor-friendly policy and regulatory environment with due regard for sustainable mining activity.

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To attract mining investments, the government in tandem with the Chamber of Mines of the Philippines (composed of major Philippine mine operators) has conducted various international road show presentations within the last couple of years. Under the Philippine Mining Act, several fiscal and non-fiscal incentives are being offered to mining investors including duty free importation of capital equipment for export-oriented activities, tax holidays during recovery of pre-operating expenses, a host of investment guarantees, among others.

Market Data
The following table shows a list of priority mineral and exploration projects in the Philippines and their status as of first quarter of 2008. The list is not exhaustive since several other projects are still in the process of filing and securing the necessary approvals from the DENR-MGB: Table 1. Priority Mineral and Exploration Projects - Philippines (As of First Quarter 2008) Project Name and Project Status Tenement or Permit Holder / Operator Country of Primary Proponent
Japan Australia Canada Philippines Philippines Philippines / UK Philippines / Canada Philippines Philippines Philippines / Switzerland

EXISTING PROJECTS A. OPERATING / EXPANSION STAGE (10 Projects) Palawan Nickel Project Coral Bay Mining Corp. / Sumitomo Corporation Rapu-Rapu Polymetallic Project Rapu-Rapu Mineral / Lafayette Canatuan Silver-Gold Project TVI Resources Development Philippines, Inc. Sto. Tomas II Copper Expansion Philex Mining Corporation Project Teresa Gold Project Lepanto Consolidated Mining Corp. Berong Nickel Project TMM Management Inc. (TMM Plc) Maco (Masara) Gold Project Apex Mining Corp. Inc. (Crew Gold) SIRC Nickel Project Surigao Integrated Resources Corporation CTP Nickel Project Surigao Integrated Resources Corporation PASAR Copper Smelter Exp. Proj. PASAR FIRST TIER PRIORITY MINERAL DEVELOPMENT PROJECTS B. CONSTRUCTION AND DEVELOPMENT STAGE (7 Projects) Carmen (Toledo) Copper Project Carmen Copper Corporation Didipio Copper-Gold Project OceanaGold Philippines, Inc. Palawan Nickel Expansion Project Coral Bay Mining Corporation Masbate (Aroroy) Gold Project Filminera Resources Corp. / PGPRC Iligan Ferronickel Smelter Plant Platinum Group of Metals Corp. (PGMC) Manticao Ferronickel Smelter Plant Platinum Group of Metals Corp. (PGMC) Philsaga Gold Project Philsaga Mining Corp. (Medusa Mining Ltd.) C. FEASIBILITY/FINANCING STAGE (10 Projects) Tampakan Copper Project Sagittarius Mines (Xstrata Copper) Surigao HPAL Project Taganito Mining Corporation/Sumitomo Metals Canatuan Base Metal Project TVI Resources Development Philippines, Inc. Itogon Gold Project Itogon Suyoc (Anvil Mining) Nonoc Nickel Project Philnico Processing Corp.(Citic UAA Group) Acoje PGE/Nickel Project Crau Minerals (Rusina Mining Ltd.) Boyongan Copper Project Silangan Mindanao Mining Co. / Anglo-Amercian Mindoro Nickel Project Crew Minerals Akle Cement Project Eagle Cement Corporation Isabela Nickel Project Platinum Group Metals Corporation D. ADVANCED EXPLORATION STAGE (8 Projects) Colet Copper Project Colet Mining (Copper Resources Corporation) Siana Gold Project Greenstone Resources / Red 5 Agata Project (Copper-Gold-Nickel) MRL Gold Philippines, Inc.

Philippines Australia Japan Australia Philippines Philippines Philippines/Australia Philippines / Switzerland Philippines/Japan Canada Philippines/Australia Philippines Australia Philippines/Australia Canada Philippines Philippines Philippines / S. Africa Australia Canada

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Project Name and Project Status

Balabag Project Runruno Gold Project

Tenement or Permit Holder / Operator

Country of Primary Proponent

Philippines / Canada Australia Philippines / Australia Philippines / Australia Philippines Philippines Philippines Philippines Philippines Philippines Philippines / Canada Australia Philippines / Canada Philippines Philippines Philippines Philippines USA Canada Canada Australia Australia Philippines Philippines Australia Australia

TVI Resources Devt. Philippines, Inc. Metex Minerals Resources Corp. Manila Mining Corp. / Bayugo Copper-Gold Project Anglo-Amercian Exploration(Philippines) Hallmark Mining Corp. / Austral-Asia Link Pujada Nickel Project (BHP Billiton Nickel) Sta. Cruz Nickel Project-Benguet Benguet Corporation SECOND TIER PRIORITY MINERAL DEVELOPMENT PROJECTS (5 Projects) Amacan Copper-Gold Project Philippine Mining Development Corporation Batong-Buhay Copper-Gold Project Philippine Mining Development Corporation Diwalwal Direct State Dev. Proj. Philippine Mining Development Corporation Far Southeast Gold Project Lepanto Consolidated and Mining Corporation King-King Copper-Gold Project Benguet Corporation PRIORITY EXPLORATION PROJECTS (23 Projects) Batoto Gold Project Philco Mining Corporation (Sur American) Conner Apayao Gold Project Anglo American Exploration Capcapo Project Jabel Corporation (Kadabra Mining Corp. / Olympus Pacific Minerals, Inc.) Macro Asia Palawan Project Macro Asia Mining Celestial Nickel Project Celestial Nickel Mining Exploration Corp. Nalesbitan Gold Project El Dore Mining Corp. Vista Buena Mining Vista Buena Mining Corp. Mt. Mines Copper-Gold Project Phelps Dodge Exploration (Freeport McMoran) Archangel Gold Project MRL Gold Philippines, Inc. Lobo Gold Project MRL Gold Philippines, Inc. Pao Gold Project Royalco Gambang Gold Project Royalco Colossal Offshore Magnetite project Colossal Mining Citinickel Palawan Nickel Project Citinickel Corporation Barlo Copper Project Montague Resources Panaon Gold Project Royalco Century Peak Nickel Project Century Peak Surigao Nickel Project-Oriental Synergy Oriental Synergy Del Gallego Gold Project Kumakata Mining Co., Inc. / Phelps Dodge (FreeportMcMoran) Hixbar Copper-Gold Project Rapu-Rapu Minerals Inc. Panag Gold Project Philco Mining Corporation (Sur America) Tagpura Copper Project Philco Mining Corporation (Sur America) Tapian San Francisco Project MRL Gold Philippines, Inc. Source: Mines and Geosciences Bureau, Department of Environment and Natural Resources

Philippines / USA Australia Philippines / Canada Philippines / Canada Canada

As of February 2008, total investments in the countrys mining industry already reached $1.4 billion, according to the DENR. Table 2. Philippine Metallic Mineral Production (January December, 2007) MINERAL COMMODITY UNIT USED 2007 QUANTITY 2006 QUANTITY Precious Metals Gold KGS. 38,792.00 36,141.31 Silver KGS. 27,754.00 23,501.69 Base Metals Copper Concentrate DMT 88,095.60 71,842.00 Copper Content of Concentrate MT 22,862.29 17,161.00 Nickel Concentrate DMT 17,912.00 14,409.88

% CHANGE 7.33 18.09 22.62 33.22 24.30

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Nickel Content of Concentrate Nickel Direct Shipping Ore Nickel Content of Ore Metallurgical Chromite Chemical Grade Chromite Refractory Chromite Zinc

MT DMT MT DMT DMT DMT DMT

10,078.92 6,188,631.00 68,075.00 16,549.70 11,685.67 3,357.00 15,925.21

8,242.40 3,912,396.00 56,463.00 25,233.73 16,783.00 4,711.00 0.00

22.28 58.18 20.57 -34.41 -30.37 -28.74

Source: Mines and Geosciences Bureau, Department of Environment and Natural Resources

Best Prospects
With the expected resurgence of mining activities in the Philippines, the demand for various equipment, supplies and service provisions is also expected to rise. According to industry sources, such equipment requirements to be utilized in various stages of operations, include but are not limited to: Drilling Equipment (e.g., hydraulic drills, jumbo drills) and Parts; Exploration Equipment and Technical Services; Specialized Construction Equipment (e.g., cranes, bull dozers, backhoes) Supplies and Consumables (Pumps, Grinding Balls, Chemicals and Reagents, Filtration Equipment, Explosives); Trucks, Moving and Hauling Equipment, Excavators, Front End Loaders, Tire Handlers; Milling and Processing Equipment (e.g., Conveyors and conveyor system components, sub mills, cyclone, crushers, continuous mining machines); Replacement parts for both underground and surface mining equipment; Ancillary Services (e.g., mine rehabilitation, mine safety training, equipment repair and maintenance); and Mine Safety Equipment (e.g., self-contained breathing apparatus, safety gear, fire protection)

Key Suppliers
On the supply side, industry players describe the market as extremely competitive. Scandinavian companies such as Atlas Copco and SandvikTamrock dominate the market for drilling and other ancillary equipment and supplies. Meanwhile, major heavy equipment brands such as Caterpillar (U.S.), Komatsu (Japan) and Volvo (Europe) are firmly established in the Philippines and are aggressively pursuing market share for equipment such as excavators, hauling vehicles, graders, dozers and water tanks. Meanwhile, with the entry of British, Canadian and Australian mining firms into the Philippines, mining equipment suppliers, contractors and service providers from such countries may not be far behind. Several local companies represent foreign principals that offer various mining supplies and consumables for both underground and surface mining operators. These suppliers are located in countries such as the U.S., Canada, China, Korea, Japan, Germany, UK, Chile and Australia. Local suppliers generally offer items that complement imported ones or provide ancillary services like repairs and logistics support. Freight costs are an important sourcing element, in as much as local mining companies prefer to get products from suppliers with regional (i.e., Asian) hubs for faster delivery. Minimizing freight costs is one of the reasons that major suppliers outsource the manufacture and/or assembly of its equipment or explore joint venture arrangements with other OEMs in countries such as China and India. Industry sources note that price, quality, product support and reliability are factors that drive competition, albeit at varying levels and depending on the type of clients or market segments served. Generally, after market support is what differentiates the more established suppliers and service providers from the rest of the competition. After market support is expected by Philippine buyers in the form of spare part supply, on-site service and repair, and preventive maintenance and training.

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Due to the availability of more sophisticated mining technologies and processes, multinational suppliers such as Caterpillar are introducing local mining operators to the concept of operating cost per hour, incorporating time and motion studies and tonnage elements into the costing and budgeting process for major capital expenditures. Financing also plays an important role in the decision to acquire equipment, so much so that major suppliers typically offer in-house financing or other alternatives such as trade financing (e.g., local commercial banks or through international export credit agencies such as the U.S. Ex-Im Bank) and commercial lease arrangements with reputable banks.

Prospective Buyers
According to industry sources, the market for mining equipment is basically classified into four different buyer segments: (1) purchase of equipment at auctions or similar wholesale trading venues on an as is, where is basis and are perceived to be the most price-sensitive segment; (2) purchasers of quality used and/or reconditioned equipment that are still in good working condition; (3) firms that rent and/or lease equipment, further classified as those on a pure rental or lease arrangement or those who eventually acquire the equipment on a rent- or lease-to-own mechanism; and (4) purchasers of new equipment, who are are perceived to be the most conscious of quality and performance. Re-fleeting plans vary among end-users of mining equipment, depending on the actual useful life of the equipment and the extent to which the equipment are utilized and overhauled. Industry sources say the refleeting cycle range from three (3) to five (5) years, but for some as long as eight (8) to ten (10) years.

Market Entry Strategies

For new market entrants, local representation is highly encouraged, either through the establishment of a subsidiary or by appointing a local agent, stockist, reseller or sales representative (whether on exclusive basis or not). Local companies also have the advantage of providing after sales support, which is required especially by the more established clients. Industry sources claim that building personal rapport with clients is one of the more crucial aspects in clinching a sale. Clients could refer to either the mining operators themselves or mining contractors (e.g., UKbased Leighton is the dominant player in the local mining contracting business) tasked to work on mining projects or both. On-site visits, product demonstrations and engagement with reputable associations such as the Philippine Society of Mining Engineers (PSEM), the Chamber of Mines of the Philippines and the Philippine Mine Safety and Environment Association (PMSEA) are some ways of firming up the relationship with local players. There are low barriers to entry, as evidenced by a growing number of suppliers that are positioning themselves in the market. Tariff rates for imported mining equipment range from one to three percent, and are usually borne by the end-user or are already imputed on the total cost of the equipment. Export-oriented mining operations are exempted from the twelve (12) percent Value Added Tax (VAT) imposed on equipment.

Market Access Issues & Obstacles

While the Philippines remains a mineral resource-rich country, industry analysts point out barriers to realizing the full potential of the mining industry here. The Fraser Institute, in its survey of Mining Companies for 2007/2008 actually ranks the Philippines as among the Top 5 in terms of mineral potential but, ironically, is ranked near the bottom of the 65 countries identified as mining investment destinations. Analysts point out to the seemingly excessive and slow regulatory procedures, laws that give local governments significant power over the exploitation of mineral resources, the invasion of mining concessions by illegal miners or small-scale mining

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operators and security problems surrounding many mines in remote regions as deterrents to attracting 1 investments. In response, the Philippine Government formed the Minerals Development Council in 2005 to coordinate the activity of mining-related government agencies; to improve transparency; and to encourage an investorfriendly policy and regulatory environment with due regard for sustainable mining activity. The continuing dialogue among various stakeholders ( host communities, local government units, indigenous peoples, the influential Catholic church and cause-oriented groups) address significant issues remains a priority for mining proponents. Meanwhile, capacity building measures on the part of the regulators and oversight agencies are being proposed in order to ensure a transparent bureaucracy and a stable policy environment. On the technical and capacity building aspects, industry players voice their concern over the diaspora of technical specialists, geologists, engineers and other mining practitioners who seek greener pastures overseas. This has had a significant impact on attracting talent into the domestic mining industry. In response, the government in collaboration with the private sector and academia is looking to identify ways in developing new talent, but admits that it may take time to develop a pool of skilled manpower in anticipation of the surge in mining investments.

Trade Events
The Chamber of Mines of the Philippines regularly organizes a mining conference (dates and venues vary) while the Philippine Mine Safety and Environment Association (PMSEA) holds an annual national mine safety and environment conference usually in November in the countrys summer capital, Baguio City. There are also regional (i.e., Asia-wide) trade shows and events typically held in Singapore, Indonesia or even Manila. The ASEAN Federation of Mining Associations (AFMA) currently chaired by the Philippines, will hold its annual Asia Pacific Mining Conference and Exhibition in Manila on October 2008 (www.afmaasean.org).

Resources & Contacts

Mines and Geosciences Bureau (MGB) of the Department of Environment and Natural Resources (DENR) www.mgb.gov.ph Chamber of Mines of the Philippines - www.chamberofminesphilippines.com ASEAN Federation of Mining Associations www.afmaasean.org Philippine Society of Mining Engineers - www.psem.ph

For More Information

The U.S. Commercial Service in Manila, Philippines can be contacted via e-mail at: Bebe.Montesines@mail.doc.gov; Phone: +632 888 6619 or +632 888 4088; Fax: +632 888 6606; or visit our website: www.buyusa.gov/philippines

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1

Greenlees, Donald. Miners shun dream lodes International Herald Tribune May 15, 2008.

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accuracy or completeness of information in this or any other United States government document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. International copyright, U.S. Department of Commerce, 2008. All rights reserved outside of the United States.

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